Westpac has admitted its internal culture can “dilute” accountability for failings and is overhauling how it calculates executive pay in response to last year’s protest vote by angry shareholders.
The country’s second largest bank said on Monday that it recognised it had not gone far enough with the cuts it had made to 2018 bonuses in response to a flat profit and the fallout of the financial services royal commission.
More than 64 per cent of shareholders voted against Westpac’s remuneration report at December’s annual meeting. If more than 25 per cent do so again this year, a vote on whether to spill the board would be automatically triggered in accordance with the Corporations Act.
Chairman Lindsay Maxsted acknowledged on Monday that Westpac had not given sufficient weight to the reputational damage from revelations of misconduct at the financial services royal commission, nor to its failure to grow full-year profit.
“The message that the board’s determination of executive remuneration was not in line with the expectations of our shareholders was very clear,” Mr Maxsted said in a letter to shareholders.
“The risk and reputation matters that emerged across the sector combined with a flat financial performance in 2018 meant that many shareholders believed the board did not apply enough downward discretion to short-term variable remuneration outcomes.”
Westpac’s profit for the 12 months to September 30 was flat at $8.07 billion after customer compensation and legal costs contributed to a weak second half at its consumer and wealth divisions.
Chief executive Brian Hartzer’s cash bonus was down about 30 per cent on the prior year, but his total realised remuneration fell just 9.4 per cent to $4.94 million.
Mr Maxsted said on Monday that Westpac had listened to shareholders and would provide details of a new remuneration structure – which will better acknowledge reputational issues, improve transparency and allow discretion to be applied – in November’s annual report.
He said an internal inquiry had shown Westpac needed to improve its approach to managing non-financial risks, and said work was already underway to address its shortcomings.
“While our culture, governance and accountability settings in their totality generally support the sound management of non-financial risks, our approach is less mature than our approach to managing financial risks,” Mr Maxsted said.
“At the same time, the report confirmed that we have an analytical and consultative culture that can slow down decision making, create undue complexity and dilute accountability.”
Westpac was just one of many institutions to be hauled across the coals at last year’s royal commission and, like its peers, is waiting for government and regulator action to fully implement commissioner Kenneth Hayne’s recommendations.
“Where we can, we are taking action now,” Mr Maxsted said.
“However, for many of the royal commission recommendations, we must wait for new legislation and regulation before implementation.”
Westpac last month reported a 22 per cent fall in first-half profit to $3.296 billion due to the cost of refunding customers for its past missteps.
“The provisions in first-half 2019 also reflect our commitment to deal with the major outstanding issues we are facing as quickly as possible,” Mr Maxsted said.
Westpac is due to report its full-year results on November 4. It will hold its annual meeting on December 12, when shareholders will get their chance to pass judgment on the new remuneration report.
Shares in Westpac were 0.57 per cent lower at $28.07, making them the worst performing among the big four banks at 1204 AEST.
The decline was about twice as large as that in the ASX200 financials and that of the overall market.